July 15, 2013

1% Growth: QE Policy a Failure, Time for A Change

Economists are now ratcheting down their forecasts for final
2nd quarter GDP to 1% which just further illustrates the
ineffectiveness of fed policy measures. Ben Bernanke blames fiscal policies out
of Washington, saying he can only do so much to counteract their lack of a healthy
tax code, job creation plans, and inefficiencies.

However, it is starting to look more and more like Fed policy,
a lack of creative fed policy, or even too much fed policy is equally to blame
for the non-recovery five full years after the financial crisis.

Dallas Fed President Richard Fisher talked about pushing on
a string, and it looks more and more that the fed is actually doing more harm
than good to the economy with their programs.

Pushing on a string implies that they just aren`t getting
the desired results from their programs, but that they definitely are not
having negative effects on the economy. But the Fed is actually damaging the
economy through policy measures in several ways.

Low Interest Rates Hurts many Segments
of the Economy: Savers

For example, just in my limited sphere of contacts on a
daily basis over the last four years I have met many people who rely on CDs for
their income; this is their only major source of income. They are unemployed,
their spouse has died, and the deceased husband left enough money in a CD
program with a paid off mortgage for the wife to pay her monthly living
expenses.

The Stock market is great for younger, more risk taking
investors, but for many baby boomers and others not wanting to take chances on
the market given its volatility CDs with higher interest rates serve a valuable
need in the economy for protection of capital, with a slight return to
supplement their income.

This entire market niche has been hurt and destroyed by the
fed policy of keeping low rates for such an extended period of time.

A high saving`s rate has many benefits for the economy. For
one, it means the health of people’s finances is in much better position to
handle unexpected life events. Often the government has to fill in the gaps
when citizens fall upon hard times because their savings rate was inadequate.

This is an inefficient model, which leads to higher
governmental debt, higher costs, and higher taxes which provides a major
economic headwind for future growth.

The Stock Market isn`t the Economy

Another way in which low rates hurt the economy is that
companies are incentivized to buy back stock with these low interest rates
instead of using the money to put towards business investment which will lead
to more hiring.

This improves the economy because the derivative benefits of
higher employment feeds on itself, and more add-on jobs are created to account
for more spending in the economy by those members of society who now have
disposable income to buy goods and services.

I worked in major fortune 500 companies, and I can tell you
from firsthand experience, the executive team who are the ones who make all the
business decisions, mainly care about hitting their earning`s expectations so
they don`t get fired. Furthermore, making sure their stock price goes up so
they don`t get fired and collect with all their executive peers the hefty stock
options that become vested in their compensation plans.

The stock buybacks accomplish those two goals far better
than growing the business through planned business development. Ergo, extremely
low interest rates where borrowing money at exceptionally low rates serves as a
major enabler of the status quo and proves as a dis-incentive for taking risks,
growing the business through creative means, and hiring new employees. It is
highly ironic because these are the desired outcomes that the Fed talks up in
their policy philosophy.

This is a major reason why corporate earnings are so much
better than the actual economy for the last 5 years. The fed might want to look
a little deeper into the harm this has caused for economic growth the last five
years. A major QE policy failure in my opinion.

Gasoline & Oil Prices much higher
than Fundamentals = Major Tax on Growth

In fact, Oil and gasoline priced much closer to the
fundamentals would have served as a major stimulus to consumers who would have
much more disposable income to infuse into the economy over the last five years.

Instead all this money goes towards filling up the tank, and
even limits mobility as high gas prices, limit travel, leisure opportunities,
and even business profits which could be used for re-investment, and hiring additional
workers.

The amount of money that is wasted on higher energy prices,
and the knock on effects that high energy prices have on business growth and
investment models served as a major drag on the economy over the last five
years and is a major policy failure.

America needs to Rethink the Makeup
of the Federal Reserve: Too Much Group Think

This is much worse than merely pushing on a string Mr.
Fisher, this is outright fed incompetence. The incompetence is that the fed
continues the same policy initiatives even after it fails to get the desired
results they were seeking at the outset of the programs. That is why they
continue additional QE programs.

But what did Albert Einstein say regarding insanity and
continuing to do the same thing over and over again, and expecting different
results? You would think that after the policy didn`t meet their objectives,
that they would try something different! I think this is where we need more
diversity in the Fed governors.

We have too many members of the same ilk, same type of academics,
no market experience, no business experience, no minorities, when was the last
time an African American was on the Fed, or an Asian American, a Latin
American, etc. How about cross-discipline smart people on the board of
governors?

But the failure, and continued adherence to a limited scope
of fed tools to try and invigorate this economy given substandard results screams
out “Group Think” on the Board of Governors at the Federal Reserve.

Inaction is sometimes the best
policy: Let the natural business cycle work

It is obvious that more diversity is needed on the Fed; we
need more diverse points of view from an analysis standpoint. Sometimes no
policy action is actually a policy tool, I know who would have thought?

It is the same notion behind a divided Congress; that they
will become gridlocked, and thus cannot pass a bunch of costly legislation that
will increase government spending, waste money through inefficient programs,
and actually harm the economy.

Well, the same thing applies to Fed inaction; a Fed that did
nothing might have actually produced a much better outcome over the last five
years. Think of a world where we have low energy costs, higher interest rates,
and businesses make decisions based on needing to grow a business by providing
value towards consumer needs versus useless stock buybacks.

Stocks buybacks have nothing to do with Business Development,
and businesses investing and spending, and thus hiring is what is required to
really grow the economy!

Maybe some middle ground might have even better results like
low interest rates for six months, and then slowly start raising the Fed Funds
Rate every four months by 25 basis points would have better overall results.

But it is hard to argue that a Fed that did absolutely
nothing could have had less of an economic impact than producing a 1% GDP
quarter 5 years out from the recession. It is time for a major Sea-Change in
Federal Reserve Policy. Replace the entire team; we need some new minds with
new ideas regarding monetary policy. Sometimes it is better to do nothing at
all!